Mathew Gross, one of my coworkers at Mindshare, is fascinated by economic bubbles. While talking on Friday about a client matter, I diverted him to a question that’s been eating away at me for days: "If economic shocks tends to pop or cement the deflation of a particular bubble, what bubble will be popped by the economic shock of Hurricane Katrina?"
With at least 7-10% of the nation’s gasoline going through the gulf, along with a significant amount of the nation’s shipping, there’s no doubt every sector of our economy will feel the effects of the hurricane and it’s aftermath. What will be profoundly different for the next two years that we had seen as a consistent active and overhyped force for the last two years?
We came down to two possible ‘bubbles’, the housing bubble and the artificically low price for American gasoline. With the world’s supply of oil only growing incrementally, and the world’s demand growing nearly exponentially, Americans’ artificially low-priced gasoline is ripe for a rise. It was already due to rise anyway, and as it jumps during this crisis, it may reduce a bit, but the economy will start to build in the allowances for it. Prices will inch up and people will adjust other elements of their spending, and then the Rubicon of $3 and $4 per gallon gas will become a norm. Just today I drove out on a necessary trip to Great Falls, VA and found two of the three gas stations in the area out of gas, and the third one pricing gas at $3.50 for 93 octane unleaded. As I filled my 23 mpg ‘mommy wagon’ up, a tanker was refilling their tanks. Down the highway went countless SUVs and within a few minutes, I even saw a Hummer.
What’s truly fascinating is that the price of gas may be the thing that finally pops what I would call the "ex-urb" bubble, the trend of people to live way out in the middle of nowhere in 5,000 square foot houses because they can drive an hour to work because gas is so cheap. Mathew said he thought the quadrupling in the cost of natural gas to heat these McMansions would have a bigger effect than even gasoline on the flight from such homes.
Only time will tell.